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Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?

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It may seem perverse to use a particularly strong piece by Martin Wolf of the Financial Times, who even on his rare less than stellar days is reasoned and readable, to illustrate a deep rooted problem even for critical thinkers in the mainstream media, namely, that certain ways of framing issues are simply off limits. But those forbidden vantages are sometimes the most descriptive and potentially the most effective in galvanizing public opinion.

Wolf’s article today is a wonderful bit of high dudgeon, a shredding of Basel III, the latest incarnation of BIS rules on bank capital (our Richard Smith was similarly less than impressed and provided more detail on the shortcomings). Treasury Secretary Geithner, who tacitly admits that the so-called Dodd Frank bill fell short of the level of intervention needed to prevent another financial crisis, has taken to touting the idea that getting enough capital into the banking system will do the trick., which means he is effectively fobbing the problem off on Basel III.

Now narrowly speaking, the idea that enough bank capital would do a lot to prevent future crises isn’t wrong, but it begs the question of what “enough” is. Absent a lot of other coordinated measures (constraints on off balance sheet entities, much tougher accounting, limits on rehypothecation, securitization reform), “enough” would need to be a very big number. Steve Waldman, who wrote a definitive post on why bank equity figures are at best a conjecture, put the needed level of bank equity ex other measures at 30% of assets, a level that Wolf independently deems to be within the required range.

It’s great fun to see the Basel III rules, which for the most part been treated with undue reverence by the media and many commentators, get the drubbing they deserve. Per Wolf:

To celebrate the second anniversary of the fall of Lehman, the mountain of Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger about to gobble up the world economy. Such special pleading – of which this pampered industry is a master – should be ignored: withdrawing incentives for reckless behaviour is not a cost to society; it is costly to the beneficiaries. The latter must not be confused with the former. The world needs a smaller and safer banking industry. The defect of the new rules is that they will fail to deliver this.

Am I being too harsh? “Global banking regulators . . . sealed a deal to . . . triple the size of the capital reserves that the world’s banks must hold against losses,” says the FT. This sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much…. the new standards are also to be implemented fully by 2019, by when the world will probably have seen another financial crisis or two.

This amount of equity is far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis, as historical experience shows (see chart). It would not take much of a disaster to bring such leveraged entities close enough to insolvency to panic uninsured creditors….. We might think of the new requirements as a “capital inadequacy ratio”.

Wolf then points out that the banking industry has managed to gin up analyses, using dubious assumptions, that endeavor to show that considerable cost to growth of higher bank capital levels. Funny, then, that the far from bank-unfriendly BIS did its own assessment and its estimate was 1/8 the level of the banking industry scaremongers.

Wolf then comes perilously close to making a fundamentally important observation, but pulls back (emphasis ours):

We cannot assess the costs of regulation without recognising a few facts: first, both the economy and the financial system have just survived a near death experience; second, the costs of the crisis include millions of unemployed and tens of trillions of dollars in lost output, as the Bank of England’s Andy Haldane has argued; third, governments rescued the financial system by socialising its risks; finally, the financial industry is the only one with limitless access to the public purse and is, as a result, by far the most subsidised in the world.

Read the boldfaced part again. Big finance has an unlimited credit line with governments around the globe. “Most subsidized industry in the world” is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.

But the subsidies go beyond that. To list only a few examples: we have near zero interest rates, which allow bank to earn risk free profits simply by borrowing short and buying longer-dated Treasuries. We have the IRS refusing to look into violations of REMIC rules, which govern mortgage securitizations. We have massive intervention to prop up real estate prices, with the main objective to shore up banks; any impact on consumers is an afterthought.

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

Consider Fannie and Freddie pre-conservatorship. They were at least branded more accurately as “government sponsored enterprises” and “agencies” making their public/private role explicit. Yet they were over time allowed more and more latitude to act as private enterprises, particularly as far as employee pay was concerned. We know how that movie ended.

Consider now the banking industry. Admittedly, banks do not fund at the tight spreads over Treasuries that Freddie and Fannie enjoyed pre-crisis, and regulators are trying to convince investors and the broader public that they will allow big banks to be resolved and are prepared to impose losses on bondholders, but does anyone believe this will happen? Winding down even a medium sized broker-dealer is a market-disrupting activity, and the “living wills” requirement looks like window dressing. But aside from the saber rattling of Pimco about why bondholders needed to be spared any pain, we also heard troubling rationalizations, such as bank bonds are held by pension funds. Well, yes, it’s risk capital. Investors are supposed to diversify holdings and losses are part of the game. And perhaps most important reason during the crisis for not cramming down bondholders was fear of contagion: imposing losses on bondholders of one bank would lead bondholders of other at-risk firms to run for the exits, raising their funding costs and potentially putting them in a death spiral.

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

A good post by Jay Rosen of NYU explains why this sort of observation don’t get traction with the press and why that is undermining its legitimacy:

In the age of mass media, the press was able to define the sphere of legitimate debate with relative ease because the people on the receiving end were atomized– connected “up” to Big Media but not across to each other. And now that authority is eroding….

Picture 24

1.) The sphere of legitimate debate is the one journalists recognize as real, normal, everyday terrain. They think of their work as taking place almost exclusively within this space. (It doesn’t, but they think so.) [Daniel] Hallin: “This is the region of electoral contests and legislative debates, of issues recognized as such by the major established actors of the American political process.”…

Perhaps the purest expression of this sphere is Washington Week on PBS, where journalists discuss what the two-party system defines as “the issues.” Objectivity and balance are “the supreme journalistic virtues” for the panelists on Washington Week because when there is legitimate debate it’s hard to know where the truth lies. There are risks in saying that truth lies with one faction in the debate, as against another— even when it does. He said, she said journalism is like the bad seed of this sphere, but also a logical outcome of it.

2. ) The sphere of consensus is the “motherhood and apple pie” of politics, the things on which everyone is thought to agree. Propositions that are seen as uncontroversial to the point of boring, true to the point of self-evident, or so widely-held that they’re almost universal lie within this sphere. Here, Hallin writes, “journalists do not feel compelled either to present opposing views or to remain disinterested observers.” (Which means that anyone whose basic views lie outside the sphere of consensus will experience the press not just as biased but savagely so.)….Whereas journalists equate ideology with the clash of programs and parties in the debate sphere, academics know that the consensus or background sphere is almost pure ideology: the American creed.

3.) In the sphere of deviance we find “political actors and views which journalists and the political mainstream of society reject as unworthy of being heard.” As in the sphere of consensus, neutrality isn’t the watchword here; journalists maintain order by either keeping the deviant out of the news entirely or identifying it within the news frame as unacceptable, radical, or just plain impossible. The press “plays the role of exposing, condemning, or excluding from the public agenda” the deviant view, says Hallin. It “marks out and defends the limits of acceptable political conduct.”

Anyone whose views lie within the sphere of deviance—as defined by journalists—will experience the press as an opponent in the struggle for recognition. If you don’t think separation of church and state is such a good idea; if you do think a single payer system is the way to go; if you dissent from the “lockstep behavior of both major American political parties when it comes to Israel” (Glenn Greenwald) chances are you will never find your views reflected in the news. It’s not that there’s a one-sided debate; there’s no debate.

Yves here. Ambrose Bierce, in The Devil’s Dictionary, described a partnership as “When two thieves have their hands so deeply plunged into each other’s pockets that they cannot separately plunder a third party.” Pointing out that banks are de facto partners of the state, enjoying substantial privileges (that unlimited checkwriting on official coffers when things go bad, the ongoing subsidies, the lavish private sector pay) without commensurate duties opens a huge can of worms. It goes beyond the usual, relatively anodyne “privatized gains and socialized losses” and opens up the terrain of “What do we mean by private enterprise?” Part of the American ideology is that there is a hard line between government and business. But entire industries suck off the state with far too few strings attached. The black/white distinction is illusory; what we instead have is a gradient.

But looking hard at the degree of looting and abuse of taxpayers, particularly in light of lavish CEO pay, not only raises uncomfortable questions, but calls for remedies that are politically unpalatable. Even though the state is deeply involved in enterprise, our ideology is that explicit industrial policy or other forms of involvement is a bad thing, the government will screw it up (when in fact some foreign governments do a decent job but we’d never deign to learn from them). So we’d rather limp along with a defective and increasingly costly model than challenge deeply held political beliefs.

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72 comments

  1. Richard Kline

    Yves: “But the subsidies go beyond that. To list only a few examples: we have near zero interest rates, which allow bank to earn risk free profits simply by borrowing short and buying longer-dated Treasuries. We have the IRS refusing to look into violations of REMIC rules, which govern mortgage securitizations. We have massive intervention to prop up real estate prices, with the main objective to shore up banks; any impact on consumers is an afterthought.

    The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking.”

    Beneath the surface of most economic outcomes lies a political equation. This is why the discipline was originally ‘political economics.’ This was also why factions aligned with the political equation worked so very hard 1880-2010 to make economics a ‘scientific discipline;’ which requires removing emotion; which means setting politics aside. Which means eating the poppy paste and facilitating the political equation.

    Our political system has become captured by the wealthy. In consequence, it isn’t possible to fix our economic problems because the fix is in for the political equation underneath them. We’ll only get fairer economic outcomes if we overwrite the political equation. . . . No one said this was going to be easy.

    1. tradejoe

      Just a quick quibble – I don’t think it’s the “wealthy” that have captured the system. I know a few wealthy people that have no political connections, donate money, spend to create jobs, and have employees.

      It’s the politicians, bureaucrats, banksters, union reps, etc. The mortgage bankers, the real estate agents, etc. The people that create false illusions in order to skim off the top (some of them might actually believe their machinations are “helping” society).

      If you are going to characterize, you should get the actors right.


      And how about the much larger fiction that the Federal Reserve is a branch of the Federal Government and not the privately owned cartel that it is? How about teaching that in civics class?

      1. i on the ball patriot

        Just a quick quibble — I don’t believe for one instant that there are any wealthy people anywhere on the planet “that have no political connections”, and further, that they are not aware on some level that they have gained their wealth on a totally corrupt tilted playing field and by doing so they have taken far more than a fair share of life’s pie and at the same time have validated and legitimized that corrupt playing field.

        Deception is the strongest political force on the planet.

        1. Ishmael

          i — my guess is you probably do not know too many wealthy people. The average politician is a sociopath. Most wealthy people have worked hard at some small business doing long hours. Either they still have the business or they sold it and have the money. They have their hobbies, their family and etc. They do not like poiticians and do not want to be involved with them. Accordingly, they do not have many connections with politicians. On the other hand there are the hedge fund and banking types who have the same sociopath makeup and they spend a large amount of their time with politicians.

          Some people might think of me as wealthy but I would consider myself upper middle class. Oh I have had some parties with politicians but I never call them up. I know a number of people (clients) who are in the $10 to $20 million category and a few with more. Many did not realize what was happening and when I told them what I thought in 2006 and 2007 thought I was nuts (I was in the deviant zone and was told I was nuts — by the way I am a CPA and consult with some high net worth personalities). Most wealthy people I know stay as far away from politicians as they can because as one person told me at a cocktail party, quick hide me here comes Gray Davis (when he was going to run for governor) and he is going to ask for money!

          1. i on the ball patriot

            Ishmael, you serve me Kool aid!

            You serve me Horatio Alger, win the lottery type bullshit, about the wealthy working hard long hours at some small business virtually pulling themselves up by their own bootstraps — the tears well up in my eyes Ishmael as I empathize with their brave, heartwarming, and tenacious struggle — and then you completely ignore the totally corrupt and tilted playing field that they gained their wealth on just as they do.

            The totally corrupt and tilted playing field built on exploitation, theft, and misdirection of the use of resources that excludes the masses.

            The totally corrupt and tilted playing field that they all are aware of and so deftly sweep aside when they puff their pride full thieving Horatio Alger chests.

            When you say you party with politicians but never call them up you sound like Bill Clinton who tried weed but never inhaled and in the process you make my point of awareness of them.

            Gag me with a fucking spoon!

            Deception is the strongest political force on the planet.

          2. Yusef

            Most wealthy people I know stay as far away from politicians as they can because as one person told me at a cocktail party, quick hide me here comes Gray Davis (when he was going to run for governor) and he is going to ask for money!

            Hiding from Gray Davis because he will solicit a campaign contribution is not the same thing as avoiding him because he’s a sociopath. (If he is one, and I’m not saying he is.) You were trying to make the point that many wealthy people do not have political connections, but you blew it. Most poor people don’t have to hide from Gray Davis because most poor people are never in the same room with him. Gray Davis doesn’t approach them because they don’t offer him what he needs. The wealthy people you depict, on the other hand, are in close proximity to Davis, and seem to know him well enough to read his intentions. They are able to be condescending to Davis because in fact they have something he needs and must ask them to get. They don’t like Davis because he happens to be on the make. These wealthy people have political connections, but are stingy; that’s all.

    2. Jason Rines

      You are absolutely correct in your assumptions Richard Kline, especially the last sentence.

      America is going through civil war right now. How much has been spent on the mid-term elections this year? $2B-3B, a record breaking amount.

      Assuming the people win which is not a guaranteed outcome, next would come debt repudiation which means serious geopolitical consequences including world war. No, thinking it will be easy will get you killed over the next decade.

      1. tradejoe

        I don’t think there is any different between the income and outgoing politicians – all a part of the same Replicrat party – the party of the military/industrial/union/financial services cabal plutocrats.

      2. Gary Anderson

        John Carney quoted me here: http://www.cnbc.com/id/39039150

        The issues are many but the most important one is whether there will be a derivative bet on whether they can blow a bubble of easy money loans before they need another bailout. :)

        Actually, not only do we have everyone in power or out wanting securitization and everyone in or out wanting loan guarantees by the GSE’s or little GSE’s or whatever, we have people saying that the loans will not happen without guarantees. Investors won’t invest, they say, without the banks buying up a bunch of GSE loans, and making them part of their tier 2 capital. Then the taxpayer will have to bail out these banks if things go bad because they will own too much GSE paper not to be bailed out. There will be no choice. And worse, it rips at the sovereignty of the nation not to have the choice to either guarantee or not to guarantee.

        And then you say if the people win? How are the people going to win? The Tea Party is funded by the Koch brothers. Their dad cofounded the John Birch Society. Even a Bircher reported that Glenn Beck was using JBS talking points. I wonder why?

        This explains why Ron Paul broke with Beck/Palin and said to the soldiers that they were being taken for a ride by Beck/Palin. So, the people never will win. Face it.

        1. Gary Anderson

          There is only one way the people would win, and that is to reject all easy money low and no money down loans. There is no other way to fight the international banker cartel.

  2. Expat

    Let’s be realistic. During the Go-Go Boom days prior to the Crash, bankers were lionized. Their images graced the covers of not only Fortune and Forbes, but Time, Newsweek, Vanity Fair and People (a dubious honor, I know). They were icons and conquering heroes, representing everything that was Good and Right about America and American Capitalism.

    Then most Americans learned that they were living an illusion created and maintained by Wall Street and Washington. They got angry with all the wealth being made (stolen) by Wall Street. There was no revolt, though, since in their hearts Americans could not overcome their Horatio Alger delusions nor cast their Gods down from their pedestals.

    Instead, Americans gnash their teeth, weep, and complain to Congress. And once the bubble starts inflating equally again, they will rain ticker tape down on the heads of the Geniuses of Wall Street who guided them through the Dark Days of the Great Recession and saw them safely out the other side. Wall Street is, for them, serving a public, national role as the provider of liquidity and the creator of wealth, therefore there is no problem with it suckly mightly at the public tit.

    America has the political system and economy it wants. It will change when this system gets too far advanced, but for now the delusions are fully operative.

    1. Yusef

      Are you aware the FED is a closely-held private corporation?

      I don’t think there’s any debate: the FED serves its shareholders, bankers of extraordinary wealth and power.

  3. fresno dan

    Very insightful post. I agree – it is one of those obvious things that is just not spoken of – the banking system is completely dependent upon the Federal Reserve – which would be an interesting debate in and of itself – does the FED exist to benefit the banks, or the public? As I have noted before, the FED believes in its heart that SAVING banks is good for the economy. If you have a system in which the failure of any one business causes a crisis, you don’t have a very good system, nor a free enterprize system.

    “The sphere of legitimate debate is the one journalists recognize as real, normal, everyday terrain.”
    Why I read blogs – journalists arern’t bad people – they simply lack the training and knowledge to ask deep probling questions. So they stick to the “consensus” which can more accurately be characterized as a straitjacket. Undoubtedly why we get constant coverage of insane soapbox preachers in Florida.

  4. Will

    This post is much appreciated, Yves.

    We need to socialize the idea that the banking system is a leach that is killing the host.

    Unfortunately, 99% of the population does not give a crap. As long as their supply chain pumps salt/fat/sugar when they push down on the handle, they will be uninterested in how/why it works. Someday they will push on the handle and a bubble will blow through.

    Seems like that day is approaching rapidly.

  5. attempter

    Yes, the MSM is not just biased, and not just savagely biased, but a vicious attacker of the people.

    ….but calls for remedies that are politically unpalatable. Even though the state is deeply involved in enterprise, our ideology is that explicit industrial policy or other forms of involvement is a bad thing, the government will screw it up (when in fact some foreign governments do a decent job but we’d never deign to learn from them). So we’d rather limp along with a defective and increasingly costly model than challenge deeply held political beliefs.

    It sounds like this is falling a little bit (terminologically) into the trap the post describes.

    Putting real constraints on the banks (if not smashing them completely, which is what really needs to be done) wouldn’t be politically unpalatable at all to the people. There’s nothing “deeply held” about the self-justifications of these worthless criminal parasites. It’s only unpalatable to the criminal elite and their criminal media.

    (On another terminological note, I wish people would make a point of purging the terms “earn” and “compensation” from discourse on this subject. “Pay” is objective in the journalistic sense, I suppose. “Extract” is technically neutral but has a richer connotation. “Loot”, “rob”, “steal” are rationally and morally true.)

    1. readerOfTeaLeaves

      I’ll offer what I hope is a cogent observation.
      I’ve been a political junkie for years, and completely agree that many of the problems that we see originate in ‘politics’ and political power, because these banksters require legislation and regs to enable the ongoing theft.

      But prior to working with engineers, and in fields related to engineering, I’d assumed ‘the laws’ were *the* big problem: got a problem? Fix the law. Well, once that happens you’re pretty much in the realm of people who majored in English, English Lit, and other humanities. I’m not dissing those fields for an instant; knowledge of the range of human activity and emotion is invaluable.

      But too many of those people then go into law, or ‘communications’ without rigorous grounding in statistics, in any subfield of hard science, or in a field of inquiry that requires them to think about how things actually w-o-r-k.

      So they think that somehow — presto! — if you use better words, or you change words in a ‘law’ , that will somehow magically fix the problem. This is, in my view, related to Yves’ excellent term: The Tinkerbell Problem. In other words, better words = more handclapping, so maybe we can save our wonderful fairy-illusion if we use words that will enable us to believe. Now, beliefs are important, and I’m not discounting the value of inspiration. But inspiration without a grounded, fact-based grasp of what has gone wrong is simply a formula for more disaster.

      Engineers, in my experience, tend to look at things and ask, “How does this damn thing actually work? Or not work? Where are the bugs? How do I find them? How many are there? How can we redesign for better functionality?”

      I read somewhere that many of the political elites in China have engineering degrees, or engineering training. (Apologies, I don’t have a citation so can’t shore up this bit of my comment.) That suggests to me that despite being steeped in ideology, they have more of the thought processes and intellectual approaches that focus less on ‘who’s fault is it?’ and more on: ‘what is it? what parts aren’t working right? how fast can we redesign? what are our best options?’

      If anyone can point me to a single US Senator with training in any field of engineering, I might eat my hat. The closest one that comes to mind in my case is Sen Maria Cantwell (Dem, WA), who worked around engineers when she was at RealNetworks. It’s not at all surprising to me that she’s been about the most astute elected that I’ve heard in breaking down some of the key problems with our financial mess (which involves electronic technologies to a large extent).

      I completely agree with the thesis of this post: banks are NOT private enterprises — certainly not at this point in time.

      I find it incredibly frustrating that electeds and others in DC cannot see this — it’s obvious to many of us, and it’s encouraging to see this post.

      But it also strikes me as quite likely that people with degrees in Communication, Journalism, English, and Law are not exactly adept at looking at this mess in any kind of ‘systems analysis’ approach and taking it apart piece by piece and laying it out — kind of the way that an engineer would lay out and diagram a car engine. (By ‘an engineering approach, I mean a scenario kind of like the following: “This part is working, that part is not… these three parts are now outdated, so toss them… redesign this element…” on and on and on…)

      I don’t see that law school prepares anyone to take this type of approach.
      I don’t see that finance or business school is good at this kind of thought process, although my background on this point is shaky, so I’m guessing that I’m correct in this assumption.

      As long as so many people in DC come from very limited educational backgrounds and fairly narrow life experiences, we’re not likely to get the range of views and problem-solvers that are desperately needed.

      The fact that Yves point is so obvious: banks are NOT private entities at this historical moment, and the longer this is not discussed, not publicly recognized, and not dealt with, the bigger our problems.

      Legal training is probably an impediment to recognizing the obvious facts that Yves points out here. So then, how to you explain to people steeped in ‘finance’ and law what is perfectly obvious to anyone who has a background in actually making things work and function?

      IMVHO, that is the bridge that badly needs constructing.
      Yves has done yeoman’s work, but this needs more public discussion.
      Any auto mechanic can probably spot it faster than most bankers, is my hunch.

        1. readerOfTeaLeaves

          Okay, 435 members of the House, IIRC.
          And 100 Senators.

          435 + 100 = 535.

          And so far, we’re locating 1 engineer…
          Yikies.

      1. shrek

        There is an obession with math and science in the US. Its true that it does increase human power, but knowledge isnt always benign. Whatever increase in knowledge we gain does not correspond to an increase in ethical behavior or poltics. Humanity clings to progress like it used to cling to religion not realizing that there is no end to history and once problems are solved others emerge to take there place.
        Bankers were engaged in the most unethical load of garbage ever and hid underneath crap math.

        1. readerOfTeaLeaves

          Whatever increase in knowledge we gain does not correspond to an increase in ethical behavior or poltics.

          I did not suggest that they do correspond.

          Math is a toolbox; so is science.
          Whether the US is ‘obsessed’ with either of them is in the eye of the beholder, IMVHO.

      2. Ishmael

        reader — what your are pointing out is what I call God made laws (mathamatics and physics) and man made laws (legal laws). The problem with people in liberal arts combined with law degrees is they believe they can legislate changes to God made laws. For example lets get rid of Mark to Market accounting and that will fix things. Guess what, God has a way of trumpeting every time.

        1. readerOfTeaLeaves

          Form follows function.
          Engineers and scientists know this.
          Lawyers need to understand it better.

          Meanwhile, holding up the fiction that the banks are somehow ‘private enterprise’ is a symptom of not being very observant, IMVHO.

      3. Lidia

        And yet a knowledge of math and statistics made it possible to construct the banking system in the first place, and is what recently-heralded “financial engineering” and “innovation” is based on.

        Financial engineering and its innovative “products” are what have been sold to the American masses as tangible goods, the envy of all outside the Anglo banking system. Despite the recent proof that such alchemy does not work to increase prosperity but merely to increase wealth extraction and accelerate its transfer to higher, righter and whiter hands, I know plenty of engineers and other people well-versed in math who still believe in such religious icons as the “free market”, lending at interest, and the GDP*, for example.

        *Anyone who talks in terms of GDP I immediately write off as not caring about the real world.. they can be said to be living in the zone of consensus, above. In reality, the GDP a measure of spending (largely waste), not of prosperity. I can’t even believe that such a measure is still in use, except as an intentional distraction by deviants.

        1. Bill White

          I’m not sure this is 100% true, as Yves’ book shows. The economics profession is much more interested in what might be called “mathiness” than math. If an academic paper contains a lot of paragraphs which start with the boldface word “Theorem” or “Lemma” that seems to count as technical work for economists. The mechanical correctness of the proofs create the appearance of truth.

          The big problem in math, which economists seem not to understand, is: What theorems are important? In the case of economics, theorems are proven which indicate, or seem to indicate, the efficiency of a particular political viewpoint. See Yves’ book for details, especially the Arrow-Debreu theorem.

  6. Maju

    Very interesting post indeed.

    The concept of bank nationalization reminds me of the 80s. In that period several Capitalist countries did that to greater or lesser extent: France, Israel, Mexico, Sweden (in the 1990s). Within this major crisis several West European countries have also nationalized some or even most of their banks: Iceland, Ireland, Germany, Portugal.

    Certainly banks, as borrowers of the state (or ‘looters’ as you say well) and key piece of the economy are too public to be merely private. A nationalization approach is in this case very reasonable, even within a pragmatic Capitalist ideology. Capitalism cannot exist in a void, after all it’s the state (and hence the national economy) which guarantees even the very existence of money, a reasonably safe market, private property… But today’s states are showing up as incredibly weak in most cases before Big Capital and this is particularly true and shocking in the case of the USA.

    Rosen’s analysis of the media generated “spheres” is very interesting too. Left me wondering how can this be described now taking in account the Internet, which certainly breaks the system to at least some extent.

    1. Lidia

      “the Internet… breaks the system to at least some extent.”

      Yes, but keep an eye on Net Neutrality and its many attackers. There are many moneyed interests who are expressing their discomfort in truly free (or at least low-cost) speech.

  7. ds

    A great post.

    When observed from afar, it is hard to notice mismanagement of an electrical power plant. The quality of power does not gradually deteriorate over time. Everything looks fine to the end user right up until the point that all the lights go off. And then everyone is screwed.

    Banks by their very nature are vulnerable to sudden and spectacular collapse. We cannot observe mismanagement at a bank from a distance — through earnings reports and such — because banks are always well capitalized right up until the point that they are insolvent. But because banks are essential to the proper functioning of our economy, we have no choice but to bail them out when they fail.

    We would never put the reliability of our electrical power supply in the hands of an unregulated marketplace. We can’t just let power companies fail, since everyone needs electricity. The same goes with banks. Banks serve a fundamental public purpose, and should be regulated like public utilities.

    1. readerOfTeaLeaves

      We would never put the reliability of our electrical power supply in the hands of an unregulated marketplace. We can’t just let power companies fail, since everyone needs electricity. The same goes with banks. Banks serve a fundamental public purpose, and should be regulated like public utilities.

      Thanks for this.

      1. anon

        Um, actually we did do that. remember Enron, rolling blackouts in CA, still a festering issue.

        But your point about regulated utulities is valid, just need to review how elec is regulated before looking to that market as the model for utility reg going forward.

  8. Parvaneh Ferhad

    I enjoyed reading this post, it’s spot on.
    It seems to me that the actual deviance is happening with people labouring to establish said consensus, as their value system is completely at odds with that of the overwhelming majority of the population.

  9. jake chase

    The marriage of the Fed and the Income Tax is now 97 years old. It has produced world wide usury, oligopoly and permanent war, but until recently Americans have been too absorbed by football, celebrity and consumption to notice.

    Very hard to get the toothpaste back in the tube.

  10. Deja-vu

    “Now narrowly speaking, the idea that enough bank capital would do a lot to prevent future crises isn’t wrong, but it begs the question of what “enough” is.”

    No, it doesn’t BEG the question, it PROMPTS the question of how much capital is enough.

  11. charles

    Brilliant commentary. What goes beyond understanding is
    that the same ‘subsidizing’is at work on both sides of the
    Atlantic, ‘patronized’ de facto by what I refer to as the
    real owners of the casino, the central banks, the banks being the ‘smooth operators’

    For anyone who has followed the Basel III’s horse-trading process, the ‘new rules’ got more watering down from the central bankers’input than from the industry lobbyists, mainly the ECB and the FED, to name the ‘usual suspects’, both ‘insitutions’whose governors’have now been given official status as bank regulators,following a crisis which, in hindsight, they ‘failed’to see coming, laxness
    in regulation, etc. And,meanwhile, the FSB, tasked by the G20, must have become a cricket team..

  12. charles

    Following my previous comment, just to bring to light
    a great paper ( published shortly before Basel ) debunking
    a few current beliefs in relation to the ‘vicious circle’:
    ‘Governments, central bankers and regulatory supervision:
    Does independence matter ?’

    http://voxeu.org/index.php?q=node/5496

  13. i on the ball patriot

    Excellent post, as was Richard’s on Basel III, both especially for the global nature of them, as that is where the action really is …

    It is not a matter of two thieves having “their hands so deeply plunged into each other’s pockets that they cannot separately plunder a third party” as it is a matter of a small group of wealthy elite global gangster thieves who control through their central banks; global corporations, nation state governments, their militaries, and Mr. Global Propaganda who masks all of the machinations for them and keep the masses entangled in an energy dissipating, life ending, herd thinning perpetual conflict.

    The real question should be “Why do we keep indulging the fiction that nation state governments are responsive to the will of the people?”

    Just as, in microcosm, local, county, and state governments in scamerica, now create policy and laws in secret with callous disregard of the will of the people, so too do the global gangsters create rules, regulations, and policy in secret with callous disregard for the people in the nation states that are affected.

    Profit driven Vanilla Greed is dead, Control driven Pernicious Greed is now at the helm.

    The lines are very clear, all of the old alliances have been deceptively co-opted and it is now rich against poor at every level in an intentionally created conflict of top down orchestration guided and implemented through Mr. Global Propaganda.

    Are we ready for the global election boycotts yet?

    Deception is the strongest political force on the planet.

  14. Siggy

    “Profit driven Vanilla Greed is dead, Control driven Pernicious Greed is now at the helm.”

    I like the line of inquiry that guides this post. Lets see; the Fed was created to serve as the agent of the Treasury and to facilitate interbank clearing and to control the issuance of credit money and oh yes it should foster full employment. In that we created a public – private partnership in the interest of serving the greater welfare of the nation.

    So what we have are 8,000 odd banks that are government chartered and of those, fewer than twenty are currently deemed to be ‘primary dealer’ banks who are permitted to bid on US Treasury debt offerings, all to be cleared thru the NYFED. There was a time when the number of ‘primary dealer’ banks was greater than forty. That tells you something about the dangerous level of economic concentartion that has occurred.

    By design and law, the Federal Reserve System is a government sponsored cartel if not oligopoly. Now the problem is that the cartel has convinced the Congress that it should be left to run amok creating whatever it can conceive such that the cartel has a basis for extracting unearned rents and bonuses. Because the remaining regulting were considered to too constraining, our ingenious banksters created a shadow banking system. Entirely unregulated and unfettered by the potential for prosecution for whatever fraud they might conceive.

    Many years ago I opined that having a banking charter, state or federal was a license to steal. Curious thing, in the absence of a belief in the need for fraud prosecutions, those minions of the banking industry have done a bangup job. One has to admire the multitude of methods that have been devised and implimented. It’s mind boggling.

    Now, this Congress has passed something called a financial reform bill that looks to be nothing more than pap, palaver and pablum for the ignorati. Being stupid is one thing, being ignorant is unforgiveable. Apart from banning prop trading in a depository institution it does not get to the heart of the problem and that is the creation of credit money that is at the core of every fiancial debacle over the past several hundered years.

    While this blog makes fair effort at exposing the cavortings of the banksters and their political cronies, nothing much is happening to correct the problem. Moreover, integrity is a very rare attribute of character to be found in the halls of government. It costs too much to get elected and then re-elected. So hat in hand the poltroon seeks the friendly bankster and what have we? Corruption on a scale not seen since Tea Pot Dome. And this scandal of stupid legislation and blatant fraud continues for want of a Justice Department that cannot see how to describe ‘intent’. After all, repo105 was just and accounting mis-statement.

    Now I can accept that the wheels of justice grind exceedingly slow. But, there is every appearance that we have not even bothered to begin to grind away at this monumental fraud.

    1. Lidia

      Siggy, the predicament is that money itself is the fraud.

      The process by which banks create money is so simple that the mind is repelled.
      -J.K.Galbraith

  15. Joe Osbourne

    This seems to be a great day for articles – first in the FT (see John Kay as well about breaking up the banks) and now this! Thanks Yves for saying calling it how it is.

  16. Hazel Henderson

    Exactly right ,Yves ! Banking and finance , as essential functions of any state or nation , as well as now globally means that they should be regulated as public utilities , as John Kay, Laurance Kotlikoff and others have also been saying. Thus ,finance is part of the global commons, not only using and mis-using ( as in flash trading) publicly financed infrastructure ( satellits,the internet and much international communucations links), but also all the other subsidies and special favors of government policies and agencies. The global nature of the financial commons was recognized at Bretton Woods in 1945. The group of participants in markets and finance produced a Statement on TRANSFORMING FINANCE , released Sept 13th on CSRWire and now at http://www.EthicalMarkets.com open for additional prominent signers .
    Yves, we would appreciate your support as well !

  17. Rick Halsen

    “So we’d rather limp along with a defective and increasingly costly model than challenge deeply held political beliefs.”

    Just as all politics are local so must political solutions. States which take the bull by the horns will set examples for others to follow. Forget about seeing viable macro solutions from the Federal level at this already predetermined stage of gridlock and malfeasance. Macro political resistance in any case will not allow it.

    Resolutions must begin with your city council, your mayor, your municipal employees which are then supported by their taxable constituencies. Some of these resolutions may entail radical adjustments and perhaps even defiance to macro misdirection from those in Washington, D.C.

    This country is a union of distinct political entities with distinct voting citizenry, with distinct borders, and each one as a consequence has its own unique circumstancial issues. That fact is conveniently overlooked when dictates emerge from a central function that has neither a micro-interest nor political expediency in resolving those issues.

    The States must begin to exercise their constitutionally given authority to override what is not in their best interests whenever possible, and most importantly to enforce financially-related law. The threat of Federal funding withholding has been the bludgeon and continues to be so. The States must shirk off their reliance of the Fed so that this bludgeon loses its impact. This will be painful on many levels and will require extensive localized political resolve.

    Ultimately it begins with you, the individual, and many more like you.

    RH

  18. psychohistorian

    This posting is great but does not go far enough, IMO. I think the next step in the discussion is who owns the banks, i.e. the uber rich.

    While this makes it a class conflict to a large degree, I think that there is a bigger issue at stake. That issue is the definition of the political economy. At this time the uber rich and their faith based followers define the political economy as tough love, trust those in charge, fear all they say are bad and do what they say.
    Others of us may want a political economy that is not faith based but relies on consistently applied law and regulation to control humanities excesses.

    We don’t just need a different set of sociopaths.

  19. Bearster

    So we’ve identified the banking sector today as fascist. This was Mussolini’s concept of big business partnered with big government, as against any newcomers and of course as against the citizens.

    Instead of recognizing this and realizing that this must end, the opposite conclusion is formed: we need to regulate them more?!?

    While we may be close to penetrating the Big Lie that banks today are a bastion of capitalism, we seem to be far, far away from penetrating the Big Lie that the State knows what’s best, or could execute it even if it did!

  20. Don in GA

    Brilliant piece Yves. With state subsidized and supported banks at the base of the economy, we have a phony state subsidized and supported economy. What would demand for goods and services and corporate earnings look like in something resembling a free market economy? Who knows, and with most stocks having an effective duration of 20-50 years or even more when thought of as bonds, I’m not going to own them.

  21. Tao Jonesing

    The fact that private banks have captured and control the state did not change the nature of the banks but the nature of the state. The banks are still private enterprises.

    The state is now a banana republic (or worse).

    1. Parvaneh Ferhad

      State Capitalism. It was predicted over a century ago by Marx, Engels, Lenin
      From Wikipedia:
      Within Marxist literature, state capitalism is usually defined in this sense: as a social system combining capitalism — the wage system of producing and appropriating surplus value in a commodity economy — with ownership or control by a state apparatus. By that definition, a state capitalist country is one where the government controls the economy and essentially acts like a single giant corporation.[2] Fredrick Engels, in Socialism: Utopian and Scientific, states that the final stage of capitalism would consist of ownership over production and communication by the (bourgeoisie) state.[3]

      http://en.wikipedia.org/wiki/State_capitalism

  22. ep3

    Exactly. and this is why we have GM being punished so harshly for taking TARP money and the banks not.
    How do you solve such a problem?

  23. Anonymous Jones

    What a tremendous post. I have nothing to add other than get this in as wide a circulation as possible.

  24. MichaelC

    Wolf lists 2 huge problems with implementing his solutions, the second of which is,

    The other is that there is tremendous potential for regulatory arbitrage, with risks shifted elsewhere in the system. Such risks can easily collapse back on to the banking system. Thus higher capital requirements for banks will only work if regulators are able to identify the emergence of systemic risks elsewhere.

    It’s a critical point and there is a readily available remedy.

    To be effective regulators must be able to identify systemic risks as they develop. The only way for that to happen is if information is available to make that assessment. BIS concurs, or at least concedes this point, as transparency is one of the nominal pillars of the system, but it gets short shrift. They do have the power to force better disclosure so folks can engage in this debate publicly and at least attempt to force change by outing the abuse and abusers.

  25. Bernard

    like i told my siblings, where was the outrage before now? this has been going on for years. the Glorification of Greed/ BAs MBAs et al the focus on Money/Power has been pushed for years.

    we reap what we have sown. how long before enough people wake up to the reality, or is it too late?

    American Society has pushed and still pushes the whole idea as business/getting rich as being morally superior to everything else. making money over treating humans as worthy of respect. Consumption, Americans were turned into “consumers.”

    the con on America started a long time ago. the War on Drugs was just a foretaste of the war we Americans live under in the consolidation of Money/Power. Businessmen learned how to subvert America for personal Power.

    and here we are. Enjoy the fascism some Americans have endorsed under the guise of “getting Government off of our backs.”

  26. John Merryman

    I think the problem goes deeper than just the banking system. Money, as a market medium, is a form of public utility which we treat as a form of personal property. These clash, because as property we like to hoard as much as possible, while as medium, when the supply of money exceeds the market’s needs, the value declines. So we would go through cycles of hoarding and crashing, if not for several hundred years of evolving financial complexity. Basically the banks are/were doing exactly what we wanted them to do, maintain the illusion that nearly infinite amounts of notational wealth can retain value in a finite economy. And earn interest at that. The fact is that the demand side of the equation, the borrowers, are who determine how much wealth the economy can hold. Yet it is those with surplus wealth who have the political advantage, since they can invest in political favors.
    So now we have a situation where capitalism is drowning in its own successful overproduction of capital, at the expense of the larger economy. Eventually we will have to treat the money itself, not just the banking system, as a public utility, like roads. Instead of draining value out of social and environment resources in order to store in banks and get taxed, we’ll just have to invest in healthier environments and stronger communities. Trust will replace regulation.

  27. Jim

    I on the ball asks “Why do we keep indulging the fiction that nation-state governments are responsive to the will of the people?”

    Why indeed?

    One possible answer to this question can be found in the historical creation of the modern concept of nationalism. Back in 2001 Leah Greenfeld wrote a book entitled “The Spirit of Capitalism” which essentially argued that modern capitalism owes its existence to nationalism.

    In essence she argues that modern economies came about not through the emancipation of rational utility-maximizing individuals but from the emergence of national consciousness.

    She defines nationalism “as a form of social consciousness, a way of cognitive and moral organization of reality which first emerged in early 16th century England and subsequently spread to English settlements in American and later, in different forms, to France, Russia, Germany and much of Asia.

    Under feudalism the nation referred specifically to elites within medieval church councils which were called “nations” representing the politcal, cultural and sovereign authority of various ecclestical and secular principalities.

    But by the 1530s the War of the Roses had decimated the traditional fedudal aristocracy and the crown became more dependent on university-trained laymen. Such individuals, began to experience upward mobility and consequently began to modify the concept of nation(to help explain their immediates social situation) to include the idea of a homogeneously noble people–the nation.

    As this idea took hold it elevated every member of the community and appealed to broad social strata.

    The modern state emerged immediately after the development of this new “idea” of the nation as an inclusive entity with its core principals of fundamental equality of membership and popular sovereignty.

    This new concept of the nation gave people a national identity and a sense of individual dignity.

    We have had 400 years of this particular organization of reality and its institutionalization through the modern state.

    But looking at this fact more hopefully, there was apparently nothing inevitable about the emergence of this specific type of national consciousness–a new paradigm could someday replace it.

    1. Ishmael

      But by the 1530s the War of the Roses had decimated the traditional fedudal aristocracy and the crown became more dependent on university-trained laymen. Such individuals, began to experience upward mobility and consequently began to modify the concept of nation(to help explain their immediates social situation) to include the idea of a homogeneously noble people–the nation.
      ————————————————-
      Really not true. Prior to Henry VIII (Henry VII effectively ended the War of the Roses) most aristocrats were trained in war and poorly trained in anything else. That is why the clergy were used to fill many of the more administrative task of running the kingdom. In fact under Henry VIII, Thomas Cromwell was one of the first nonclergy types to hold this type of position after Cardinal Woosley. It was at this time that many of the children of the aristocrats started becoming more educated and the clergy was less needed to run the kingdom. This probably also helped lead to the Reformation.

      Even though the War of the Roses did basically exterminate the Plantagenets, I believe most aristocratic lines continued relatively undisturbed.

  28. Ishmael

    Yves — I see one of the side effects of all of this is the average person is going to be less and less shocked by crime as long as it does not happen to him. Physically harm a banker or his family, who cares they probably deserved it. Then it is politicians and soon it is the store operator on the street and etc. That is probably how the Terrors came about after the French Revolution.

    Personally, it would be hard for me to sit on some jury and through some one in prison for the minor crimes I see compared to the out right mega dollar theft I see taking place every day with the big banks and DC.

  29. Doug Terpstra

    Thank you, Yves, for a killer post that even I can grasp, clearly defining a license to steal…or rob blind. And it’s good to know I stand firmly in “the sphere of deviance”:

    “Big finance has an unlimited credit line,” you write, “‘Most subsidized industry in the world’ is inadequate to describe this relationship. Banks are now in the permanent role of looters… They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.”

    Your and Martin Wolf’s scorn for the forbearance of rigged accounting standards reminds me of FDR’s (and TR’s)contempt for the machinations of the malefactors of his time, cribbed from Washington’s Blog (one could also be excused for mistaking these as Attempter’s descriptors):

    “It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over government itself. They created a new despotism and wrapped it in the robes of legal sanction. …And as a result the average man once more confronts the problem that faced the Minute Man….”
    - Franklin Roosevelt

    “A small group had concentrated into their own hands an almost complete control over other people’s property, other people’s money, other people’s labor — other people’s lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.”
    - Franklin Roosevelt

    “These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the flag and the Constitution. In their blindness they forget what the flag and the Constitution stand for.”
    - Franklin Roosevelt

    “Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people. To destroy this invisible government, to befoul the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day.”
    - Theodore Roosevelt

    http://www.washingtonsblog.com/2010/09/government-using-anti-terrorism-laws-to.html

    It makes me wish we had elected such a president, one who could stand up to TPTB, even from a wheelchair.

  30. Jim

    Ishmael, this is how Greenfeld herself characterizes this moment in English history. The quote comes from another of her books “Nationalism: 5 Roads to Modernity” p. 47.

    “Simultaneous with the destruction of the old nobility, a stratum destined to replace it appeared. The new Henrician
    aristocracy differed from the old one in terms of its functional basis and in terms of the social profile of its members. The massive creation of peers among deserving royal servants did not commence until 1530….The majority of the new creations were people of modest birth but remarkable abilities and education. They were recruited from the minor gentry or even humbler strata. The aristocracy, in fact, changed its very nature and became open to talent…The redefinition of nobility in the literature as a status based on merit, and not on birth, was a simpple acknowledgment of this change, the transfer of authority from one elite to another, was virtually happening before one’s eyes. A fundamental transformation of this kind required a rationalization and justification. It is at this juncture, I believe, that nationalism was born.”

  31. Ishmael

    Jim there is not too much different in what I said. Let me expand. Prior to Henry VIII the nobility was a fairly small group of people. The Plantagenets did a pretty good job of killing one another off leaving the opportunity for a very distant relative the opportunity to defeat Richard III. That person as Henry VII. He kept a fairly tight rain on his kingdom and did the wise thing and did not get involved in foreign entanglements. He also accumulated a massive surplus during his reign. Henry VIII came to the throne at the age of 18 and after being couped up for a number of years began to spend the surplus accumulated by his father. Prior to this time and even during the early part of his reign reliqious clerics did most of the administrative work. The Church offered the opportunity of poor people with ability to advance and many of the greatest clerics in English history rose from very humble beginnings. After Woosley fumbled a number of times with Henry’s divorce and Henry needed a fall guy for his over spending and continuing taxation, so Henry made Cardinal Woosley the fall guy. At this time Henry was basically in dire conflict with the church over his divorce so Thomas Cromwell begin to will the position previously filled by Woosley and clerics. Cromwell did not come from any Aristocratic background — here is his early life per Wikipedia — Cromwell was born around 1485 in Putney, the son of Walter Cromwell (c. 1463–1510), variously described as a clothworker;[2] a smith;[3] and an alehouse keeper/brewer,[4] as well as by some loose theories that suggest he was, in fact, an Anglo-German sheep farmer. It should be noted that Henry the VIII made him an Earl. After Cromwell served in this position I do believe it became very uncommon to have a clerics in this position. Maybe with Bloody Mary but certainly not Elizabeth the First.

    The removal of the Catholic church during the Reformation opened these position up for nonreliqious people. It should also be noted that prior to the reformation most schools were basically training for the religious order so it was not until after the reformation that nonclericals could attend these schools in mass.

    Also I believe under Henry VIII nobility was greatly expanded from the previous 38 approx positions.

    Now interesting that one of the arguments which Henry VIII presented in his divorce was that England was not just a country but in fact had always been an empire in a similar manner as the Holy Roman Empire and accordingly the Pope had no power over him. I guess arguing that is one way of arguing nationalization; however, it is kind of funny considering most of the Aristocratic families at that time both in England and Scotland were descended from French Norman families. You think of nationalization appealing to deep rooted ties to the land, but on the other hand the French Normans had been in England for 300 years.

    Hard for me to see that nationalism really started then. Later on William of Orange came over to be King of England and he came from Holland and George I (George Louis; German: Georg Ludwig; 28 May 1660 – 11 June 1727)[1] was King of Great Britain and Ireland from 1 August 1714 until his death, and ruler of Hanover in the Holy Roman Empire from 1698.

    George was born in Lower Saxony, in what is now Germany, and eventually inherited the title and lands of the Duke of Brunswick-Lüneburg.

    Accordingly if you are willing to accept a sovereign from a foreign country it does not seem that you are too nationalistic.

    I could be wrong there.

  32. john bougearel

    Wonderful post Yves.

    The thievery metaphor of both the govt and financial industry is apt. And the two thieves fit well into William Graham Sumner’s “THE Forgotten Man:

    “The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C’s interests, are entirely overlooked. I call C the Forgotten Man. For once let us look him up and consider his case, for the characteristic of all social doctors is, that they fix their minds on some man or group of men whose case appeals to the sympathies and the imagination, and they plan remedies addressed to the particular trouble”

    Obama is about to appoint Elizabeth Warren to head the consumer protection agency. This is the agency that is to expected to address C ~ the Forgotten Man. The question at hand is whether this latest scheme to help the Forgotten Man will be an effective advocate for the Forgotten Man, or whether it will become marginalized and watered down and ineffective over time, or even as early as out of the gate.

    The Consumer Protection Agency can achieve great things if it can get the various industry thieves out of the pockets of the Forgotten Man, but with the federal govt so fully captured by various industries, they will more than likely block the most initiatives brought forth by the CPA.

    More from Sumner: “Society, however, maintains police, sheriffs, and various institutions, the object of which is to protect people against themselves – that is, against their own vices. Almost all legislative effort to prevent vice is really protective of vice, because all such legislation saves the vicious man from the penalty of his vice. Nature’s remedies against vice are terrible. She removes the victims without pity. A drunkard in the gutter is just where he ought to be, according to the fitness and tendency of things. Nature has set up on him the process of decline and dissolution by which she removes things which have survived their usefulness.” (this is where the govt ought to have left the financial industry, in the gutter. But of course that did not happen, as Sumner foreshadowed back in his 1890s observations. Financial reform has saved the industry from absorbing the penalty of its own vices)

    Sumner goes on: “Now, we never can annihilate a penalty. We can only divert it from the head of the man who has incurred it to the heads of others who have not incurred it. A vast amount of “social reform” consists in just this operation. The consequence is that those who have gone astray, being relieved from Nature’s fierce discipline, go on to worse, and that there is a constantly heavier burden for the others to bear. Who are the others? When we see a drunkard in the gutter we pity him. If a policeman picks him up, we say that society has interfered to save him from perishing. “Society” is a fine word, and it saves us the trouble of thinking. The industrious and sober workman, who is mulcted of a percentage of his day’s wages to pay the policeman, is the one who bears the penalty. But he is the Forgotten Man. He passes by and is never noticed, because he has behaved himself, fulfilled his contracts, and asked for nothing….

    Such is our plight today, that of the Forgotten Man. The Forgotten Man can pin high hopes and aspirations on the new Consumer Protection Agency, but will the agency truly be an advocate for the Forgotten Man, or will it wind up being another element of social reform that does little to shift the risks of various industries onto the Forgotten Man….

  33. Memory

    My dear fellow, read Lukes, “Power, A Radical View” (specifically focus on the critique of pluralist models). For the advanced course, read Charles Lindblom and some Gramsci. The NYU guy with his spheres is reinventing a number of wheels.

  34. Roger Pool

    It is hard for a naked man to bear the humiliation of his nakedness. People think that if they assimilate any truth then they will be required to do something about it lest they are judged to be cowards or worse simply wrong. Most avoid this by avoiding the truth until it is so bad that they are either dead or so confused it does not matter. “Home of the brave”, tell me another joke…

  35. Kevin McCallister

    re: “The black/white distinction is illusory; what we instead have is a gradient.”

    I imagine the truth is probably even more complicated, with multiple axis involved. I don’t suggest these are what should be used, but you could conceptualize industry as dependent on direct and indirect subsidy, direct and indirect infrastructure, etc. Farmers are the classic direct subsidy case here in the U.S. Banks are unarguably operating with indirect subsidies via implicit guarantees and such, though they are also very clearly receiving direct subsidies at the moment. As a matter of routine, autos depend on indirect infrastructure support by way of highway spending, as did ISPs and internet services when we connected rural communities to broadband as part of the stimulus. But we spent hundreds of millions to develop a cell-based immunization vaccine production facility, etc.

    Thanks for the great post, lots of room for thought.

  36. booklover206

    Just a small correction. The correct Ambrose Bierce definition is for “Alliance” and not “Partnership.”

    ALLIANCE, n. In international politics, the union of two thieves who have their hands so deeply inserted in each other’s pockets that they cannot separately plunder a third.

    See The Devil’s Dictionary on Project Gutenberg, etc.

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